Who Pays for Leasehold Improvements?

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A leasehold in itself does not require the landlord or tenant to pay for improvements. The tenant can typically make and pay for improvements with the landlord’s permission. At the end of the leasehold term, the improvements normally belong to the landlord. Yet, some lease agreements give the tenant the option to remove the improvements and return the property to its original state. The lease may involve unimproved land or land with existing improvements.

Lease

A lease is a contract between a landlord and tenant, giving the tenant the right to exclusively use the landlord’s property for a specific amount of time. The landlord is the lessor and the tenant is the lessee. Lease agreements can be oral or written. To be enforceable, states require written leases for terms over one year in length.

Leasehold Estate

The right the lessee has to occupy the real property is a leasehold estate. This applies to the rights given to the tenant by the lease agreement, through the duration of the lease. This is typically considered a personal property right of the tenant.

Long-Term Contracts

An example of a lease agreement with improvements made by the tenant might be a retail store that leases a vacant piece of commercial property. In this instance, the tenant pays for all improvements, including building a store, installing a parking lot and landscaping. During the duration of the lease, the tenant maintains the property, including making necessary repairs. Typically, these types of lease contracts are for a long period, such as 50 or 99 years. At the end of the lease term, if the tenant and or landlord don’t agree to renew the lease, the improvements become the property of the landlord.

Landlord-Paid Improvements

Sometimes, in an attempt to entice a potential tenant to lease the property, a landlord agrees to pay for specific improvements. This might be flooring, remodeling or other alterations or additions to make the property suitable for the tenant’s needs. Normally, the landlord owns the improvements.

Other Expenses

Aside from improvements, lease terms often address operational expenses of the property. Depending on the lease terms, the lessee, lessor or both pay for property tax, utilities, insurance and or maintenance fees. Leases involving residential properties typically shift these expenses to the lessor, while commercial leases typically shift more of the financial responsibility to the lessee.

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References

  • "Modern Real Estate Practice"; Fillmore Galaty, et al.; 2006
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